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FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A risk manager criticizes a bank's reliance on a simple repricing gap report as its only interest rate risk measure. Which is the most valid limitation of the repricing gap approach?

The main weakness is that repricing gap focuses on short-term net interest income, assumes all items in a bucket reprice at the same moment, and ignores changes in the market value of equity. It therefore misses timing differences within buckets and longer-term value effects.

  1. AIt ignores the market value effects of rate changes on equity and the timing of repricing within each bucketCorrect
  2. BIt cannot be computed for floating-rate instruments
  3. CIt requires a normal distribution of returns
  4. DIt measures only credit spread risk

Explanation

Gap analysis focuses on NII over a horizon, treats all items in a bucket as repricing at the same time, and ignores the market value of equity and basis risk. The other options are not features of gap analysis.

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